The decline in applications for financial aid this spring is one effect of the pandemic on this year’s high school graduates that educators and policymakers have been tracking closely.
But that’s not the only indicator that the recession could impact students’ ability to pay for college. Assets in tax-deferred college saving plans — known as 529s — have also been falling.
According to a late May report from Morningstar Research, a financial services firm, total assets fell to $293 billion in March, down from an all-time high of $328 billion in December.
“Despite their highly diversified portfolios, 529 age-based options not only hurt during the sell off, but they were also more susceptible to declines than one might expect,” the authors wrote. They added while students 16 and younger “have a good shot at recouping losses they have sustained,” there is still the chance “economic shutdowns and additional market losses could set these individuals back further.”
In 2017, as part of a broad tax overhaul, Congress changed the rules to allow investors to use 529 plans to cover up to $10,000 a year in expenses for private K-12 schools. And at the time, some critics were predicting the change could result in lost revenue for states.
So far, in 29 states and the District of Columbia, K-12 expenses are also an eligible expense in the state tax code, according to a new 50-state comparison of 529 plans from the Education Commission of the States. But not all states recognize K-12 education expenses as legitimate uses for 529s. According to Paul Curley of ISS Market Intelligence, 11 states fall in that category.
“This is important as non-passage might make the 529 withdrawal for K-12 tuition to be considered a non-qualified distribution subject to state tax recapture of any state income tax deduction previously taken,” he wrote.
Betty Lochner, a communications skills expert and part of the National 529 Campaign, said it’s too soon to know whether more families will opt to draw on their 529 savings for private K-12 schools this fall.
But reports already show it’s a more popular option in some states than others. Louisiana, for example, is one state that is even promoting the use of the 529 accounts for K-12 private tuition. And rates of withdrawals for K-12 uses “may continue to climb as more plan holders become aware of this feature,” said Adrienne Fischer, a policy analyst with ECS.
With schools closed — and districts’ implementation of distance learning uneven — some members of Congress in April also began pushing for further flexibility in 529 accounts, saying families should be able to access the funds for at-home learning expenses, such as curriculum materials and online resources.
“We should allow distributions for such distance learning expenses be treated in the same manner as distributions for qualified higher education expenses and similar distributions for elementary and secondary school tuition,” Rep. Bryan Steil (R-Wisconsin) wrote in a letter to Congressional leaders, cosigned by 12 other Republicans.
That effort hasn’t taken off. But last year, Congress did change the rules again to allow student loan borrowers to withdraw funds for paying down student loans. Qualified withdrawals also include the cost of apprenticeships.
That means in families where a parent has lost a job, an adult can become the beneficiary and apply the funds toward “midcareer retooling” or as a “backup plan for their own learning,” Curley said.
He added that, so far, investors have been more likely to move their money into more conservative funds rather than make withdrawals for education-related expenses.
Still, the primary intent of the 529 program was to help families save for their children’s college tuition. That’s why some states have created cash incentive programs — usually $50 to $100 — to encourage parents to open 529 accounts for their children, said Andrew Smalley, an education research analyst at the National Conference of State Legislatures.
Missouri even ran a sweepstakes this year and awarded up to $100,000 in scholarships to promote the state’s 529 program.
“However, given the uncertainty in state budgets, many of these programs appear to be likely candidates to be scaled back,” Smalley said.
In Colorado, for example, a joint budget committee in the legislature recommended cutting in half the state’s College Kickstarter program to help make up a budget deficit.
The flexibility of the accounts is a “valuable feature,” Lochner added, and might especially be useful now for high school graduates reconsidering their postsecondary plans this fall.
The apprenticeship option might also be attractive to students “looking for alternatives to college,” Fischer said. “With as many as 20% of students planning to defer college attendance due to the pandemic, these alternatives may be appealing.”